Canadians with less-than-perfect credit may find it challenging to get a mortgage to purchase their dream home. If your credit score falls below 600 or you have a history of missed payments, bankruptcies, or collections, you will likely not qualify for a mortgage from a mainstream lender like one of the Big Six Banks.
The good news is that bad credit mortgages exist as an alternative mortgage option for Canadian homebuyers. While these mortgages charge higher interest rates and fees, they provide a pathway to homeownership if you have bad credit.
What is a Bad Credit Mortgage?
A bad credit mortgage is a type of financing designed for buyers with poor credit who cannot qualify for a conventional mortgage. Alternative or private lenders offer these mortgages instead of mainstream banks and credit unions.
You’ll generally need a minimum credit score of 500-600 to get approved. However, bad credit lenders emphasize your down payment amount and home equity more than your credit score. You’ll typically need at least a 20% down payment or 20% equity if refinancing.
The catch is that bad credit mortgages charge higher interest rates, usually 2-4% above conventional mortgages. You’ll also pay lender fees of 1-5%. Bad credit mortgages usually have shorter terms of 6 months to 2 years.
The benefit is that they offer a last-resort option if banks have denied you but are ready to buy a home now. They can serve as a temporary financing solution while you improve your credit.
What is Considered Bad Credit in Canada?
In Canada, credit scores range from 300 to 900, with higher being better. Anything under 660 is generally deemed subprime. Lenders have different credit score requirements, but here are some general guidelines:
| Credit Score Range | Credit Rating | Mortgage Lenders Available |
|---|---|---|
| 760+ | Excellent | All lenders |
| 721 to 759 | Good | Most lenders |
| 660 to 720 | Fair | B lenders, private lenders |
| 560 to 659 | Poor | Private lenders |
| 300 to 559 | Very Poor | Very few options |
Scores below 600 are usually considered bad credit. Most mainstream banks require minimum scores of 680+. With bad credit, you’ll need to look at alternative or private lenders.
How to Check Your Credit Score and Reports?
Given the central importance of your credit profile, it is highly advisable to check your current credit scores and reports from Equifax and TransUnion before mortgage shopping. This will help you understand precisely where you stand.
You can obtain free initial views of your scores and reports online or through your bank. However, to get your entire credit history, it is best to pay the $20-25 fee for full, comprehensive reports directly from Equifax and TransUnion.
How to Get a Mortgage with Bad Credit?
Given the factors that characterize bad credit, the path forward to mortgage approval varies. Here are 7 tips and strategies to explore if your credit profile is less than ideal.
Make a Large Down Payment
Making a sizable down payment signals to lenders that you are financially committed to homeownership and able to save. Providing 20% or more as a down payment lowers risk for lenders.
A larger down payment also means you borrow less, reducing the lender’s overall risk. With 20% down, lenders also don’t have to factor in mortgage default insurance requirements.
Add a Cosigner or Guarantor
One proven strategy is adding a cosigner or guarantor to your mortgage application. This attaches their stronger credit profile alongside yours. Requirements are that the cosigner/guarantor must have a solid income and a solid credit score.
Work with Alternative Lenders
Given the risk, mainstream lenders are hesitant to finance borrowers with any history of credit blemishes or late payments. Thus, those with bad credit must consider alternative lending sources like private lenders and B lenders.
We will explore private lenders and B lenders in detail shortly. But they should be top options if traditional banks have turned you away.
Take Time Improving Your Credit
Unless your credit woes are severe, taking 6-12 months to rehabilitate your credit before mortgage application may expand options and reduce rates. Meeting these responsible borrowing habits demonstrates to lenders you are correcting past mistakes. Even modest score improvements in a short timeframe can unlock better mortgage rates.
Enroll in Credit Counselling
If high debts and poor borrowing habits contribute to your credit struggles, enrolling with a licensed non-profit credit counsellor may help. They can negotiate with creditors for reduced interest rates, lower payments, consolidations, and debt management programs.
Learning prudent financial habits while slowly repaying debts under the guidance of a credit counsellor evidences your commitment to fixing past credit problems. This can eventually help you qualify for mainstream mortgage financing.
Consider Rent-to-Own
Rent-to-own contracts allow aspiring buyers with impaired credit to occupy their homes immediately as tenants while rebuilding their finances and credit. During a defined rental period of 1-3 years, a portion of the monthly payment is allocated to a future down payment to purchase the home.
At the end of the agreement, the renter can complete the sale and obtain mortgage financing. If their credit remains problematic, the original owner may agree to finance them directly through a vendor takeback mortgage.
Wait for Negative Information to Fall Off Reports
Another option if your credit is severely damaged is simply waiting out the clock for negative information to disappear from your credit reports. Your credit profile can be rebooted to neutral once past payment problems from a rough financial period are erased.
Types of Lenders for Bad Credit Mortgages
If mainstream banks have turned down your mortgage application due to derogatory credit or low scores, two alternative lending sources to consider are private lenders and B lenders.
Private Mortgage Lenders for Bad Credit
Private lenders are essentially hard money lenders who offer tailored financing to borrowers unable to qualify with traditional banks and credit unions. They have greater flexibility and appetite for risk than regulated mainstream lenders.
They focus less on your credit scores and history than banks and more on the value of the actual property. The property is their primary collateral if you default. For this reason, you’ll need at least a 20% down payment when working with private lenders.
However, in exchange for financing subprime borrowers, private lenders charge high interest rates and upfront arrangement fees.
Well-known private mortgage lenders in Canada include:
- Clover Mortgage
- Canadian Lending
- Alpine Credits
- Home Trust
Many only work through brokers, so connecting with a mortgage broker can open access to private lenders.
B Lenders for Bad Credit
The other alternative mortgage lending category is B lenders. These players occupy the space between prime A lenders like banks and private lenders.
B lending entities include monoline mortgage lenders like MCAP, First National, Mortgage Alliance, and some credit unions like Meridian and Alterna Savings.
Their underwriting requirements are more flexible than those of banks and traditional lenders but still tighter than those of private lenders.
In summary, B lenders provide a middle ground between prime and private lending for borrowers with fair but not excellent credit. They likely currently offer the lowest cost of bad credit mortgage financing in the market.
Pros and Cons of Bad Credit Mortgages
Compared to prime mortgages, bad credit mortgages carry tradeoffs borrowers must consider:
| Advantages | Disadvantages |
|---|---|
| Approval is possible even with very low credit scores | Significantly higher interest rates – often 2-4% above prime mortgages |
| Provide financing when traditional lenders decline | Demand large upfront lender fees of 1-5% of mortgage value |
| Only need a 5% down payment if the mortgage is insured | Typically require at least 20% down without insurance |
| Opportunity to rebuild credit through diligent payments | Very short terms – usually 6 months up to 2 years |
| Allows home purchase/refinancing despite poor credit | Usually closed mortgages, limiting portability and prepayment options |
Bad credit mortgages offer a narrowly constrained financing lifeline for borrowers shut out by banks with minor hope of redemption. However, their predatory terms mean they are best used as a temporary bridge until you can improve your financial and credit situation.
How Long Does Bad Credit Information Impact Mortgage Eligibility?
Any blemishes or adverse information on your Equifax and TransUnion credit reports will hamper mortgage approvals and increase interest rates. Depending on the severity, some black marks disqualify you from low-ratio mortgages altogether.
Here are the usual timeframes that major credit events stay on your credit reports, hurting your mortgage eligibility:
- Bankruptcies – 6 to 7 years
- Consumer Proposals – 6 years after completion
- Late Payments – Up to 6 years
- Accounts Sent to Collections – Up to 6 years
- Credit Inquiries – Up to 2 years
This illustrates why having any spotty credit history with missed payments, collections, proposals, or bankruptcies can haunt your mortgage approvals for years. Time is required to fade these mistakes from memory.
Meanwhile, posity information remains on your credit reports for up to 20 years. So avoid closing old credit accounts to retain this longer positive track record. [Source]
Maintaining long-standing accounts evidencing years of reliability is ideal for mortgage applications. Too many new accounts and credit checks conversely hurts.
Can I Get a Mortgage With No Credit History in Canada?
New immigrants to Canada often face this scenario unless their foreign credit history is portable. Low or no credit history equals high lending risk for Canadian citizens or long-time residents.
That said, 3 specialized mortgage programs do exist for specific scenarios:
Newcomer Programs
Most major banks like RBC, TD, CIBC, and BMO have Newcomer Programs allowing new immigrants to Canada to qualify for a mortgage with a foreign credit history. Eligibility is limited to newcomers who’ve lived in Canada for less than 5 years.
No established Canadian credit is required. These programs consider your overseas credit reports when underwriting.
Using Alternative Credit Data
Canadians who’ve lived here longer than 5 years may be able to rely on alternative credit data to prove reliability if it is recent and consistent.
Some lenders may consider long records of timely payments for:
- Cell phone and utility bills
- Rent paid to landlords
- Car insurance payments
A minimum of 12 months of clear alternative credit history is typically required. This demonstrates financial responsibility despite thin standard credit files.
Rent-to-Own
As mentioned, rent-to-own deals offer a pathway to homeownership for those with no credit history and who lack a down payment.
Overcoming no credit history requires patience and creativity. But options exist to prove you are mortgage-worthy through means beyond traditional credit reports.
What If My Partner Has Bad Credit, But I Have Good Credit?
When applying for a mortgage with a spouse or partner, a dilemma arises if one person has good credit but the other has bad credit.
Banks will consider both applicants’ credit, often using the lower score. The person with good credit pays the price for their partner’s poor history.
In this scenario, apply using only the better credit applicant to prevent drag from the lower score. For instance, if Wendy has good credit but Mike has bad credit, only use Wendy’s name and income on the mortgage application.
Provided the single applicant meets the lender’s affordability thresholds alone, there is no need to include a partner with adverse credit. Their debts and credit baggage only create additional risk without benefit.
Mike can still live in the home as Wendy’s spouse and contribute to payments informally. But leaving him off the paperwork boosts the chances for approval and better mortgage rates.
How Long Does Bad Credit Mortgage Approval Take?
Private and B lenders rightly promote speedy approvals as a key advantage compared to sluggish banks.
Many private lenders advertise approvals in as fast as 24-48 hours. However, allow 5+ business days for true completion, even among bad credit specialists.
Rushing the process by taking shortcuts risks overlooked details and documentation gaps that could cause hiccups.
Plus, bad credit lenders still need supporting income and identification documents. Private lenders just have less onerous requirements than mainstream banks. But full due diligence takes days at minimum.
So, set reasonable expectations when timing mortgage financing despite poor credit. Technically, it is possible to finalize within days, but practically, at least 5+ business days is realistic for careful approval.
Is Bad Credit Mortgage Right for You?
Buying and financing a home remains possible even with less-than-perfect credit or an adverse history. Where mainstream lenders see risk, specialized alternative lenders see opportunity.
But bad credit borrowers must approach these niche mortgage lenders with eyes wide open, aware of the impositions and constraints.
So tread carefully if utilizing bad credit mortgages, and always keep one eye on exiting out of them as soon as your credit standing improves.
The door to affordable home financing is never permanently closed. Contact Best Mortgage Online today for a personalized consultant!
FAQs
How can I qualify for a mortgage if I have bad credit?
You can improve your chances by making a down payment of 20% or more, adding a cosigner with good credit, working with alternative lenders, improving your credit, or pursuing rent-to-own agreements.
What credit score is considered harmful for a mortgage in Canada?
Credit scores below 660 are generally deemed subprime. Scores under 600 are considered bad credit, and there are very few mortgage options below 500.
Where can I get a mortgage if the banks turn me down?
Alternative lending sources like private and B lenders specialize in high-ratio mortgages for borrowers with bad credit.
Why do lenders charge higher rates and fees for bad credit mortgages?
Bad credit lenders charge more in interest and fees to offset the increased risk of lending to borrowers with lower credit scores or adverse histories.
When should I start trying to improve my credit before getting a mortgage?
Start monitoring and rehabilitating your credit at least 1-2 years before needing a mortgage. This allows enough time to demonstrate improved financial habits.
Do all mortgage lenders check credit the same way?
Most lenders only check Equifax or TransUnion. However, in case of variations between them, check reports from both bureaus for completeness.
Can I provide a larger down payment to qualify for a mortgage with bad credit?
Yes, larger down payments can offset bad credit since they reduce the lender's overall risk. Aim for 20% down or higher.
Is home equity important for bad credit mortgage approval?
Lenders view sizable home equity as additional risk protection if you default. Having 20%+ equity can help secure a bad credit mortgage
Do all late payments affect your credit equally?
A 30-day late payment may not be reported. But once past 30 days, the severity increases. Payments 120+ days late are the most damaging.
Can low credit utilization help my credit score?
Yes. Keeping credit card balances below 30% of your limits demonstrates responsible usage and helps improve your score.
Does my spouse's bad credit hurt my mortgage eligibility if I have good credit?
Private lenders prefer shorter terms of just 6 months to 2 years. This limits their risk compared to longer terms.